Chinese Government Think Tank Offers Insight Into Reformist Goals

Laborers set up scaffolding to clean a statue of China’s late chairman Mao Zedong.

As China’s leaders prepare to gather in Beijing next month to outline their priorities for the next decade, officials are busily hashing out the agenda in closed-door negotiations.

A set of recommendations by an influential government think tank provides one side of the argument.

In a 200-page report, the Development Research Center of the State Council, China’s cabinet, advocates far-reaching reform of the financial system, an end to the state’s monopoly on land sales and tougher management of state-owned enterprises. The report, which was reviewed by The Wall Street Journal, is expected to be published this week.

The DRC is only one among many groups submitting detailed recommendations to national leaders ahead of next month’s meeting, known as the Third Plenum. Leaders will likely balance the group’s calls for a deepening of market-oriented reforms with submissions from powerful bodies like the National Development and Reform Commission, the top economic planning agency, and the state-owned Assets Supervision and Administration Commission, which manages state-owned enterprises.

But the DRC’s proposals, dubbed the 383 Report, offer an insight into the goals of pro-reform elements within the Chinese government.

The DRC declined to comment on the response to its report from within the government.

The agency worked with the World Bank on a joint report published earlier this year titled “China 2030,” which advocated a series of reforms over the next two decades to avoid falling into a “middle-income trap” and to diffuse social and environmental problems.

Many of the suggestions in the “383 Report” echo the recommendations in “China 2030”, and are in line with mainstream economists’ thinking about how to move China towards a more sustainable growth model. Among the DRC’s proposals:

▪ Interest rate reform within three years, with interest rates on large and time-limited bank deposits liberalized first

▪ More competition in the financial sector, with establishment of privately-owned banks

▪ Set out a mechanism for banks to fail, and bring in a deposit insurance program to protect consumers when they do

▪ “Basic” lifting of capital controls within five years, with the Chinese yuan established as a major international currency within a decade

▪ Give more local governments the right to issue bonds, to end their reliance on land sales and opaque borrowing through financing vehicles

▪ Allow farmers to take out loans with their land use rights as collateral within the next two years, moving to a fully open market for land by 2020

▪ Roll out a property tax nationwide

▪ More competition in closed sectors like railways, electricity and oil pipelines

▪ Corporatize state-owned enterprises and set up a national asset manager modeled on Singapore’s Temasek

The proposals on SOE reform are slightly softer than those in “China 2030”, which called for the state sector to pay higher dividends to the government and retreat from industries not considered strategic. But the timetable for land reform, one of the most sensitive topics for the Party, is aggressive.

But formidable obstacles to these proposals remain. Local governments will be reluctant to give up their lucrative control over land allocation, while state-owned enterprises and their backers in the government may resist changes to the status quo.

“Many of these reforms appeared in the 12th Five Year Plan that was released in 2011, and the progress has not been significant,” said Zhiwei Zhang, an economist at Nomura. “So it remains to be seen how effective the new government will be in implementing these reforms.”

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